From Pizza Wars to Price Fixing

New York City requires of its residents many decisions. Not long after moving to the Big City from Texas, I was faced with pledging my allegiance to either the Bronx Bombers, a baseball team that has won 27 World Series championships, or their Queens-based rival. Then there was the unspoken commitment I made with two or three street vendors at strategic locations around the City (these locations are worth fighting for, too).

Perhaps most important to this law student on a budget, was choosing the pizza parlor I liked best. Pizza sellers throughout the City compete to provide the cheesiest, greasiest slice at the lowest price, so this was no easy contest.

Last April, we reported that Pravin Patel, who oversees Bombay Fast Food/6th Avenue Pizza, and Eli and Oren Halali, owners of the 2 Bros. Pizza chain, found themselves in a fiercely fought price war. One establishment would lower the price of a slice and the other would follow until eventually each was selling a slice of pizza for 75 cents. This is an excellent price anywhere you live, but in The Big Apple, it’s something of a miracle. It didn’t last long. The two pizza competitors weren’t happy with the lowered cost and have come to an agreement to keep a $1 price tag per slice.

But was this really an instance of antitrust violation? We investigated.

The Sherman Antitrust Act is the federal statute intended to prohibit activities that restrict interstate commerce and competition in the marketplace. Section 1, which is applicable here, says that every contract, combination, or conspiracy in restraint of interstate trade or commerce is illegal. And as recently as 2010, the U.S. Supreme Court decided American Needle, Inc. v. National Football League et al., which held that the key to determining if there is a “contract, combination, or conspiracy” is whether two separate decisionmakers were joined together.

The Times quoted Mr. Patel as saying “we make a compromise” and Daniel Bravo, a cashier at 2 Bros. Pizza, saying “we just saw them talking outside. Next thing you know, it’s a dollar.”

Uh-oh.

To satisfy the interstate commerce requirement, courts have held that the conduct must either directly interfere with the flow of goods in the stream of commerce or the conduct must have substantial effects on interstate commerce. It’s not likely that these two Mom and Pop-style pizza sellers have a substantial effect on interstate commerce but the price agreement may interfere with the flow of goods if, for example, ingredients used to make the pies are from out of state.

It’s unlikely all of the pizza ingredients came from New York.

All told, then, it would seem that so far, our pizza guys, though they probably didn’t realize it, had violated our federal antitrust laws.

And whether they knew it or not wouldn’t matter. Because what the pizza boys had done was engage in what’s known under the law as horizontal price fixing. As explained in 2006 by the U.S. Supreme Court in Texaco Inc. v. Dagher, when an agreement is without question anticompetitive and significantly impairs competition so that no further inquiry is needed, the agreement is illegal per se.

It was really looking bad for the future of my $1 pizza.

I kept at it, trying to find a ray of sunshine in the darkness a future of higher priced pizza promised.

An argument could surely be made that the Sixth Avenue pizza guys weren’t doing anything to significantly impair competition. Considering that New York City is home to over one thousand pizza restaurants, it’s not likely that two pizza providers have the ability to control the market.

Section 340 of New York General Business Law mirrors the Sherman Act and says that “every contract, agreement, arrangement, or combination” that unlawfully interferes “with the free exercise of any activity in the conduct of any business, trade or commerce” is illegal. In 2012, the Court of Appeals of New York determined that parties to any price fixing agreement must have power in the relevant market to produce a market-wide anticompetitive effect.

Even better. As delicious as their pizza slices may be, and despite the media attention their price-wars have garnered, Bombay and 2 Bros. surely weren’t mighty enough to affect Gotham’s pizza market.

But what about the quotes in the Times, the smoking gun that told us that the fix was in?

We were unable to reach anyone of authority at 2 Bros. (were they hiding from the antitrust police?) but when we spoke with Bombay Fast Food manager Mohit Kumar Mitra he empathically told us, in a crotchety tone, that there had been “no agreement.”

The establishment was losing money and unable to pay bills or meet its rent at the 75 cent rate and therefore independently decided to raise the price back up to $1. Any similarity between the prices was simply a coincidence. He was shocked, shocked, that I implied a violation of antitrust law might have polluted his establishment.

2 Responses

The Court of Appeals decision cited in the blog held that, just as in a Sherman Act case, market power is a necessary element of a RULE OF REASON complaint, and noted that no allegations of per se illegality were made in that case. So although the NY Attorney General probably has better things to do (unless additional pizza parlors were involved), if (!) these guys agreed, they did violate state antitrust law.

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